The U.K.-based publication The Guardian published an article on 23rd October detailing recent suicides among indigenous residents of the Cambodian province of Ratanakiri, all of whom had been microfinance clients and were described as suffering intense psychological distress as a result of over-indebtedness. Cerise+SPTF was quoted (accurately) describing the over-indebting of clients and abusive collections practices as violations of our Client Protection Standards. We also requested the certifying bodies to place under review the client protection certifications of those institutions which were named among the violators.

Among the many important points raised by The Guardian article, there are two we would like to highlight. First, leadership matters. Our experience—all over the world and for more than 20 years—has taught us that in every institution, the commitment to client protection comes from the very top or not at all. In Cambodia, we have been conducting intensive high-level briefings for the CEOs and boards of every major financial service provider, attendance at which has been mandated by the regulators. Since the effort launched in June, we have briefed more than 300 top executives and shareholders. This focus on leadership is especially relevant in a microfinance market like Cambodia’s in which, as the article describes, prominent microfinance institutions, originally founded by purpose-driven impact investors and executives, are being sold off to profit maximizers, many of which are headquartered outside the country.

Second, microfinance debt is just one piece of over-indebtedness. Over-indebted microfinance clients usually owe money not just to their microfinance providers but also to unlicensed, unregulated informal lenders (variously described as moneylenders, local neighborhood lenders, or loan sharks). As The Guardian article describes, even if microfinance institutions will restructure or forgive loans for those who cannot repay, loan sharks will not. To avoid driving desperate, already over-indebted clients into the arms of loan sharks, formal financial service providers have an urgent moral obligation to behave responsibly. They must perform rigorous prequalification and cash-flow analysis of their low-income clients, even if (especially if) that analysis is harder to conduct for clients whose record-keeping is not the strongest. More important, the credit officers must be able to turn down unqualified clients without worrying about sales targets. This of course means, again, that the institution’s leadership must base its growth and profit expectations around what’s healthy and—crucially—must communicate in words and actions that client-facing staff will not be penalized for lower production. Finally, providers must accept that even carefully screened clients can get in over their heads, and work with such clients to restructure loans when that happens.

While we do not believe that over-indebtedness can ever be eliminated, we are convinced it can be greatly reduced if financial service providers embrace the spirit, not just the letter, of the laws and policies around client protection. Our message to the players in Cambodia who are sincerely trying to do good is to resist the temptation to give up and find easier markets to work in, and instead to stay and help clean up the problems.

But financial service providers are not the whole story, in Cambodia or anywhere else—all market actors must play their roles. Too much borrowing is done to meet basic needs or respond to emergencies. Depending on the context (this may not be relevant in many developing countries), where social safety nets do exist, people who need grants and direct relief should access those instead of borrowing.

Finally, clients themselves must know what level of borrowing, if any, is a good idea for them and must also possess the discipline to say No to anything more than that. Neither one of those things—the knowledge or the discipline—is necessarily easy. In the Philippines, the national microfinance association ran a pilot test last year for intensive financial literacy training to be delivered among potential microfinance clients. The training, delivered by third-party contractors, walked the participants through the terms and conditions of various loan products and through the uses and misuses of credit. At the end of the training, fully half of the would-be clients decided not to take loans after all.